The Big Bugaboo about Crypto and Money Laundering

We keep hearing stories about cryptocurrencies being used for nefarious purposes.

In fact, some people seem to associate cryptocurrencies mostly with child pornographers, drug dealers and terrorists.

Even during a recent Senate hearing, some of the testimony raised concerns that Bitcoin and other cryptocurrencies might usher in a new area of money laundering.

This is not an allegation cryptocurrency advocates should take lightly. Nor is this rhetoric coming from typical “fake news” sources.

Most of it seems to originate from influential institutions like the IMF and U.S. Treasury Secretary. Steve Mnuchin himself said flatly that he doesn’t want “bad people to use these currencies to do bad things.”

We don’t either. But let’s take a moment to conduct …

A Reality Check

First off, where’s the evidence? Even as these claims are thrown around, little or no data is provided to back them. So, I figured I’d do some digging.

One of the most comprehensive studies I found was done in collaboration with a blockchain analytics company called Elliptic.

Their finding: Only about 1% of Bitcoin transactions are related to illegal activities, mainly drug trafficking. They admit that their methodology doesn’t pick up all of the activity and the actual number could be a lot higher. So for argument’s sake, let’s dial up the estimate all the way up to, say, 5% of transactions.

Back in 2009, the United Nations estimated that criminal activity represented about 3.7% of World GDP, and there’s no reason to believe that percentage has changed significantly since then.

So, with world GDP now at about $89.26 trillion, that would imply \an estimated $3.5 trillion is illicit activity. It also means that our $21 billion estimate for Bitcoin illicit activity is a drop in the bucket by comparison.

At most, illegal Bitcoin transactions represent, 0.6% of the total illegal transactions globally. Less than one percent.

Put another way …

For each dollar criminals and terrorists use in Bitcoin, they use at least $167 worth of greenbacks, euros, yen and other fiat currencies.

Real Offenders Go Scot-free

If money launderers use Bitcoin and other cryptocurrencies for just 0.6% of their activities, where do they go for most of the other 99.4%?

First, because that could shut down a big chunk of the entire banking system.

Second, because it’s a lucrative business.

And third, because regulators can always hide behind the official line that they’re “beefing up security measures” to catch the bad actors next time around.

Trouble is, the dirty money keeps flowing into the banking system, and so far, at least, there’s been no slowing it down.

All of which leads us to the punchline: The real battle is not against any particular currency that the bad guys happen to be using. It’s against the bad guys themselves.

Indeed, when it comes to fiat-based money laundering, no one in the world proposes that investigators or prosecutors target the currency they’re using. So, why do they talk about targeting cryptocurrencies? Could it be because some view cryptos as a competitive threat to the fiat-based systems they control?

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